Soaring education costs diminish RESP effectiveness: Dale Jackson
With the school year a few weeks in, nerves from dropping off little ones for the first time may be diminishing, but parents will have plenty more to get nervous about as the years go by.
According to a recent study from Embark, a not-for-profit resource for education planning, the cost of a four-year university degree and residence in Canada is expected to grow by 39% over the next 18 years.
The study found that the price of higher learning will reach $105,000 by 2041, and that doesn’t even include the cost of advancing to a master’s or doctorate degree.
For 2023, Embark has pegged the average cost of a four-year university degree and residence at $75,000.
The federal government offers relief for cash-strapped parents through a savings and investment plan called a registered education savings plan (RESP), but the lifetime contribution limit of $50,000 and the lifetime grant limit of $7,200 has not changed since 2007.
How the RESP works
Post secondary school costs can be crushing for parents faced with the burden of paying for a child’s education, especially if it requires living away from home.
Despite its diminished effectiveness, the RESP remains one of the best ways to finance a child’s education for parents who start saving early.
The plan matches annual contributions from a parent by 20% up to $500, to a lifetime maximum of $7,200. To maximize the full government grant, parents need to contribute an average of $2,500 each year.
Unlike registered retirement savings plans (RRSPs), which have decades to grow, RESPs only have up to an 18-year time horizon. That means the money in the plan needs to be invested for a shorter period as time as it will be withdrawn over a short period of time.
Since the funds need to be invested in the broader markets to grow, there are risks when investing in an RESP. The money can be invested in just about anything – stocks, bonds, guaranteed investment certificates (GICs), mutual funds, exchange traded funds – just like investments in an RRSP or a tax-free savings account (TFSA).
There are investment products tailored to RESPs, which a qualified advisor should be able to recommend. Most financial institutions, including banks, credit unions and mutual fund companies provide RESPs. Scholarship plan dealers – companies that only sell RESPs – offer individual, family and group plans.
The contributions and grants grow tax-free while in an RESP, but unlike at RRSP, they can’t be deducted against a parent’s income. Instead, it is taxed when withdrawn in the hands of the low-income student who is typically taxed at a lower marginal rate.
If a child decides not to continue after high school or if too much money is accumulated, you will have to pay tax on the money earned in the plan as interest. This money is called “accumulated income.” It will be taxed at the parent’s regular income tax level, plus an additional 20%. At that point the money that the parent puts into the RESP is returned.
The Canada Education Savings Grant can be shared with a brother or sister if they have grant room available – otherwise, the grant must be returned to the Government of Canada.
Once again, there is a lifetime limit of $50,000 for each child.
To get a better idea of how much as RESP need to grow to keep pace with the rising cost of a post-secondary school education, Embark offers an online calculator on its website.
For more information on this, or anything else, please reach out to your Arbutus Financial team member.
Source: Bloomberg Opinion